Q: What is an ESOP?
A: An Employee Stock Ownership Plan (ESOP) is a tax-advantaged retirement plan that allows business owners to sell shares of stock to their employees as part of an employee benefit plan. For many family-run small businesses that have invested their time and money into the company for generations, an ESOP is a beneficial tool for succession planning and allows a loyal workforce to obtain ownership in the company as well. Having ownership gives employees even more skin in the game, fostering productivity to meet the company’s goals. The company’s success translates into higher returns as the value of their shares grows. And that incentivizes loyalty in the workforce to become fully vested, boost annual distributions and grow retirement nest eggs. At my annual 99 county meetings, I often hear from family-run businesses and employees who strongly support ESOPs. They say it boosts company morale and generates civic pride in the business and their local community. What’s more, the owners are thrilled to see their lifelong business continue to thrive and stay in local hands. Passing on the reins of a family farm or small business weighs heavily on the minds of many Iowans. Many of these operations are expected to change ownership over the next decade or so. This creates uncertainty for many local communities whose family-owned businesses have had a big impact on the tax base, school enrollment, economic vitality and social capital in the surrounding region. Workforce shortages and employee retention are regularly brought up at my county meetings, including at a local business earlier this year in Pella.
Q: What legislation are you cosponsoring to support ESOPs?
A: As a former chairman of the tax-writing Senate Finance Committee, I understand the federal tax code serves as a vehicle to foster economic growth, influence business decisions and consumer behaviors and grow retirement savings. In July, I joined a bipartisan bill called the Promotion and Expansion of Private Employee Ownership Act to simplify the route for small businesses to set up ESOPs. It would eliminate barriers that too many businesses face to establish a stock ownership plan for their employees. The complexity of the tax code and burdensome requirements should not stand in the way of an aging generation of business owners from allowing their workers to gain ownership while they gain an offramp to pass on their business and achieve financial security in retirement. So many farmers and family businesses are cash-poor, asset-rich. An ESOP is a strategic tool that’s a win-win for family businesses and their workers. Our bill would improve incentives for owners of S corporations to establish an ESOP. Under an S corporation (named after subchapter S in the tax code) all business income is passed through to its owners and subject to tax at the individual level rather than at the corporate entity level. More than half of small business firms in the U.S. are set up as S corporations. Our bill would provide technical assistance for these businesses to form an ESOP; ensure they retain their Small Business Administration (SBA) certification; doubles down on preserving the ESOP structure in the federal tax code; and creates an Employee Ownership Advocate at the U.S. Department of Labor to support the roll-out and success of employee ownership opportunities. Simply put, the federal tax code should not stand in the way of small, family-owned businesses from setting up ESOPs for their employees. Last October, I was pleased to speak at the Iowa CEO Employee Ownership Conference in Ankeny. I’ll continue to be a voice for small businesses at the policymaking tables and look forward to holding Q&As with small business owners and their employees during my annual 99 county meetings across Iowa.